 Financial Variables in a Policy Rule: Does It Bring Macroeconomic Benefits?Czech Journal of Economics and Finance (Finance a uver), 2019, vol. 69, issue 2, 122-148 Abstract: The main aim of this research is to find whether direct incorporation of the financial variables in the monetary policy rule can bring macroeconomic benefits in terms of lower volatility of inflation and output. This paper sheds light on the performance of the augmented Taylor rules with financial variables in a small open economy. For this purpose, a New Keynesian DSGE model with two types of financial frictions is constructed. This work provides three conclusions. First, incorporation of asset prices in the monetary policy rule can be beneficial for macroeconomic stabilisation in terms of lower implied volatilities of inflation and output in the response to certain domestic shocks. Second, the usefulness of the augmented monetary policy rule with asset prices deteriorates in case of the shocks originating abroad. The most favourable results as a response to foreign shocks delivers the rule accounting for movements in inflation and output, since this rule can accommodate foreign first-round effects. Third, when all shocks are set to be operative, the best performance delivers the rule accounting for movements in output. Keywords: DSGE models; financial imperfections; inflation targeting; monetary policy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:fau:fauart:v:69:y:2019:i:2:p:122-148 Access Statistics for this article More articles in Czech Journal of Economics and Finance (Finance a uver) from Charles University Prague, Faculty of Social Sciences Contact information at EDIRC. |
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